Spectrum Markets are Robust,
When You Remember to Feed Them
Thomas W. Hazlett
Professor of Law & Economics
George Mason University
thazlett@gmu.edu
Spectrum Markets: Challenges Ahead
Conference @ the Kellogg School of Management
Northwestern University
June 2-3, 2011
Killer App of 2007
Kellogg Conf. * Spectrum Markets
2
June 2, 2011
Steve Buys Spectrum
• contracts with carriers
• carriers’ liberal control rights in CMRS enable
• not “exclusive use” but intensely shared
• right to exclude  protects network investment
• purchase spectrum + network access
• efficient bundles
• vertical integration of tight complements
• naked license sales - tip of the iceberg
Kellogg Conf. * Spectrum Markets
3
June 2, 2011
Spectrum Secondary Markets Nascent?
• Spectrum an input into network services
• Wireless services two-sided output market
• subscribers
• vendors (devices, services, apps)
• piggyback networks (MVNO, M2M)
Kellogg Conf. * Spectrum Markets
4
June 2, 2011
Robust Secondary Markets
Kellogg Conf. * Spectrum Markets
5
June 2, 2011
Exhaustive Rights for Markets?
• FCC: yes, rights need to be clearly and
exhaustively defined for markets to work
• FCC: we have never defined “harmful
interference,” the key border condition
• FCC: mobile markets work great, bring
innovation & growth to the economy
Kellogg Conf. * Spectrum Markets
6
June 2, 2011
Rights Definition Minimalism
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TUFs (titulo de usufructo de frecuencia) in Guatemala specify
(1) frequency band
(2) hours of operation
(3) maximum power transmitted
(4) maximum power emitted at the border of
adjacent frequencies
• (5) geographic territory
• (6) duration of right (beginning and ending)
• the market works
Kellogg Conf. * Spectrum Markets
7
June 2, 2011
3G Coverage in Central America
(courtesy of Amazon Kindle)
http://client0.cellmaps.com/viewer.html?cov=1
October 2010
2G coverage light purple
3G coverage dark purple
Great Advantages
• liberal use rights let parties bargain
• free entry
• quick adjudication of border issues
• time limits and arbitration procedures specified
• transparency
Kellogg Conf. * Spectrum Markets
10
June 2, 2011
Spectrum Contours “Hard”?
• stochastic emissions
• uncertainty in identifying conflicts
• like land, IP, water, fish or oil deposits?
• irrelevant claim
• difficult line drawing for administrators, too
• Coase 1959
• costs of the “price system” vs. regulation
Kellogg Conf. * Spectrum Markets
11
June 2, 2011
Simple Rights (C. Jackson 2005)
Kellogg Conf. * Spectrum Markets
12
June 2, 2011
Difficult (overlapping complements)
Kellogg Conf. * Spectrum Markets
13
June 2, 2011
Anti-commons Tragedy
• a rights assignment failure
• fragmentation produces excessive t-costs
• can be solved ex ante by regulators
Kellogg Conf. * Spectrum Markets
14
June 2, 2011
Ownership Integration
Kellogg Conf. * Spectrum Markets
15
June 2, 2011
Alternatively, Administrative
Restrictions
Kellogg Conf. * Spectrum Markets
16
June 2, 2011
Canadian White Space
Kellogg Conf. * Spectrum Markets
17
June 2, 2011
Killer App of 1952
Kellogg Conf. * Spectrum Markets
18
June 2, 2011
Anti-commons Tragedies
Kellogg Conf. * Spectrum Markets
19
June 2, 2011
2.5 GHz (ITFS/MMDS  EBs/BRS)
Kellogg Conf. * Spectrum Markets
20
June 2, 2011
XM-WCS (2006)
Kellogg Conf. * Spectrum Markets
21
June 2, 2011
XM buys WCS licenses
• July 14, 2005
• NAB letter
• The proposed transaction is part of a longstanding
pattern of deception by the satellite radio
industry. In 2003, while publicly claiming it had no
plans to insert local content on its network of
terrestrial repeaters, XM spent months seeking a
patent for technology to do just that.
• FCC blocked merger
Kellogg Conf. * Spectrum Markets
22
June 2, 2011
Efficient Rights
• standard templates – e.g., CMRS
• don’t worry about exhaustive perfection
• large band allocations
• combinatorial auctions help efficient aggregation
• no service, technology, business restrictions
• overlays for bands littered with incumbents and
white spaces
Kellogg Conf. * Spectrum Markets
23
June 2, 2011
T-costs and the Nirvana Fallacy
• hold-outs and bargaining costs are positive
• everywhere
• analysis: overlays v. gov’t reallocation
• remembering: market t-costs highly sensitive
to policy rules
Kellogg Conf. * Spectrum Markets
24
June 2, 2011
U.S. CMRS
• 50,866 licenses (2003)
• 1,122 (AWS 2006)
• 1,099 (700 MHz)
• 734 cellular markets
• 493 BTAs
• 51 MTAs
Kellogg Conf. * Spectrum Markets
25
June 2, 2011
50,000+ deals later
(Stifel Nicolaus 4.15.08)
Kellogg Conf. * Spectrum Markets
26
June 2, 2011
Emptying the Spectrum (TV Band)
Warehouse One Box at a Time
• 1953
• 81 channels (486 MHz)
• 1982  needed bandwidth for cellular
• 67 channels (402 MHz)
• 2009  needed bandwidth for 3G/4G licenses
• 49 channels (294 MHz)
• 2015  need bandwidth for ‘mobile data tsunami’
• 29 channels (174 MHz)
Kellogg Conf. * Spectrum Markets
27
June 2, 2011
Case-by-Case is a Long March
FCC, National Broadband Plan (March 2010), Chapter 5.
Kellogg Conf. * Spectrum Markets
28
June 2, 2011
Standardized Overlays
•auction secondary rights using liberal template
•vest incumbents
•buy-outs, partnerships eliminate border wars
•rights enable capex to create band clearing
•side payments for alternative solutions
•cable/satellite carriage to move TV stations
•overlay licensees internalize cost of delay
•efficient alternative to administrative process
Kellogg Conf. * Spectrum Markets
29
June 2, 2011